Eleventh Circuit Holds That Term Lenders Do Not Have Standing To Enforce Funding Obligations Of Revolving Lenders

1. Introduction

   On February 20, 2013, the Court of Appeals for the Eleventh Circuit Court in Fontainebleau held that term lenders did not have standing to assert claims against revolving lenders under the same credit agreement for failure to fund, absent specific contractual provisions to the contrary.1 In the same decision, the Eleventh Circuit also held that summary judgment in favor of the borrower on their funding-related claims against the administrative agent and revolving lenders was improper because the terms governing the revolving lenders' funding obligation were ambiguous, thus requiring extrinsic evidence to establish the parties' intent.

   While the second part the Eleventh Circuit's decision may have received much attention, it is the denial of standing that will be of particular significance to the lending industry. Revolving lenders in particular may be relieved to hear that a decision to decline a borrower's funding request does not expose them to the litigation risk that term lenders under the same credit agreement will come after them, unless the credit agreement specifically permits them to do so.

2. Background

   In June 2007, Fontainebleau Las Vegas LLC and Fontainebleau Las Vegas II LLC, as borrowers, entered into a credit agreement (the "Credit Agreement") with Bank of America,2 as administrative agent, and certain lenders to fund the development of a casino-resort in Las Vegas, Nevada. The Credit Agreement provided for three facilities: (a) an initial term loan in the amount of $700 million, which was fully funded upon the execution of the Credit Agreement, (b) a delay draw term loan with a commitment of $350 million, and (c) a revolver with a commitment of $800 million. Importantly, section 2.1(c)(iii) of the Credit Agreement required that the revolving loans could not exceed $150 million unless the delay term loan commitments have been "fully drawn."

   On March 2, 2009, Fontainebleau requested to draw the full amounts then available under the delay term loans and the revolver, i.e., $350 million and $670 million.3 The administrative agent rejected this borrowing request on the ground that section 2.1(c)(iii) of the Credit Agreement requires that the delay term loan must first been fully funded before revolving loans in excess of $150 million could be requested. A simultaneous borrowing request under both facilities would thus improper.

   Fontainebleau countered that the Credit Agreement merely required that the delay term...